You wish to diversify your single-security portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your portfolio?
A) Treasury bills that have a correlation coefficient of 0.0 with your current security
B) Alpha Company stock that has a correlation coefficient of -0.25 with your current security
C) Beta Company stock that has a correlation coefficient of 0.50 with your current security
D) Delta Company bonds that have a correlation coefficient of 0.36 with your current security
Answer: B
Explanation: B) Negative correlation means that two different asset returns move in different directions over time. Thus one can offset the bad performance of the other.
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